Mine Accident Shows a Potash Market Nervous About Supply Shocks

The news, when it came late Friday night from a government ministry in Minsk, was grim: the ceiling of a potash mine in Belarus had collapsed more than half a kilometer underground, trapping two workers.

Halfway around the world, the reaction to the headlines was swift and dramatic. Shares of some of the largest potash producers soared in New York and Toronto on speculation that the accident could knock out a large chunk of global production capacity.

The March 9 episode vividly illustrates that after a decade of gluts, the industry is suddenly nervous again about supply shocks. Demand has been constantly increasing and any change in production from the world’s top suppliers in Canada, Belarus and Russia has the potential to impact the market dramatically, said Daniel Sherman, a senior analyst for Edward Jones in St. Louis.

“If a large mine in one of those suppliers is hit, it’s clearly going to put a dent in the supply,” Sherman said by telephone. “One of the key things is the supply is very concentrated.”

Potash Market Share

Belaruskali is the world’s second-largest producer

Source: Green Markets data compiled by Bloomberg Intelligence

State-owned Belaruskali is the world’s second-largest potash producer and is one of three companies, alongside with Russia’s Uralkali and North America’s Canpotex, that accounts for more than 60 percent of total output. The fertilizer ingredient is used to strengthen plant roots and boost drought resistance.

While Belaruskali insists there is no threat to production, the accident has shown how vulnerable the market is to disruptions at a time when demand is poised to rise: India and China are negotiating supply contracts, buyers are looking to purchase fertilizer ahead of spring in the Northern Hemisphere, and Canadian producers recently idled 1 million metric tons of output.

Mine Outages

Miners in Belarus and Russia are running at full capacity and “could not produce more” if they tried in the short term, said Jonas Oxgaard, analyst with Sanford C. Bernstein & Co. Any outages could allow for higher prices for Canpotex, a joint venture which markets sales outside of North America for Nutrien Ltd. and Mosaic Co.

The removal of one of Belaruskali’s mines would take out about 2.5 million tons, or roughly 4 percent of global production, Goldman Sachs analysts Adam Samuelson and Brooke Roach said in a March 9 report.

“If there’s an upset, you’re going to have a shortage somewhere,” said Sanford’s Oxgaard, adding that there hasn’t been a major outage from a potash mine in several years, and “we are basically due,” he said.

A supply squeeze could help potash prices to recover after years of ample inventories. It could also mean a rebound for fertilizer equities. U.S. producer Mosaic has climbed about 3 percent in 2018, but the shares are down more than 50 percent since the end of 2012 as a multi-year rout for crops cut farmer spending.

While outages are infrequent, they have caused supply shocks in the past. In 2006, Uralkali lost a mine after a sinkhole wider than 100 meters opened above the site. In 2014, a flood at Uralkali boosted prices at a time when companies were curbingoutput following the breakup of the company’s sales alliance with Belarus.

No Warning

In Belarus last week, the roof of the potash mine tunnel crashed down, with methane being discharged, Belaruskali Chief Executive Officer Ivan Golovaty said in a statement on the company’s website. While “such phenomena do occur in our Starobin potash deposit,” it was the first time an incident of such scale happened without any prior warning signs, he said.

Sudden outbursts of salt and gas in Belaruskali mines are caused by geological structures which have gas in their nucleus, contained under enormous pressure. Workers had no chance to react and escape and two people were caught by the falling rock and died “in a fraction of a second,” according to the statement.

Belaruskali Deputy CEO Anatoly Makhlai said company production is now stable and shipping is normal.

“There is absolutely no threat of us stopping production at this mine,” Makhlai said by phone from Soligorsk. “The mine has several directions, and the incident affected only one mine tunnel in one of the several mine sectors. Idling it is out of question, everything is working.”

Even so, the accident shows the risk associated with potash supply and could drive prices higher in the short term, Jacob Bout, an analyst at Canadian Imperial Bank of Commerce, said in a March 9 report. Canadian exports remain strong amid demand from Asia, and as prices tick higher, there’s a possibility the Chinese supply contract may top $250 a ton, up at least 9 percent from a year earlier, he said.

We’ve reached a crisis resulting from unrelenting opposition to pipeline construction, abetted by foreign funding and a federal government obsessed with green ideology

Special to Financial Post

Joe Oliver

March 13, 2018
9:08 AM EDT

People recently gathered to protest the Trans Mountain pipeline expansion project at the Kinder Morgan tank farm in Burnaby, British Columbia.Courtney Pedroza/The Seattle Times via AP

The latest proof is in, although the facts have been obvious for many years. Foreigners are financing and organizing opposition in Canada to natural resource development, part of an anti-fossil-fuel campaign that is costing our economy an estimated $15 billion this year, due to lack of access to international markets, and much more in lost capital investments.

Perhaps the most recent little gem will finally get the chattering class to acknowledge reality: A leaked U.S. document preparing mass-action protests against Kinder Morgan’s Trans Mountain pipeline expansion project. It sets out goals and operating principles for a clandestine organization designed to drive political resistance under the guise of an independent rank-and-file protest movement.

“Action Hive Proposal” was written by Cam Fenton, an employee of 350.org, a California-based NGO “building a global grassroots climate movement.” Using insect analogies (theirs, not mine) the “Hive” contributes money, action and organizational experience and technical know-how, while a “Swarm” will generate mass action. Fenton is explicit about its “Purpose & Shared Goals: This group is coming together to support mass popular resistance to construction of the Kinder Morgan pipeline.”

This is not the only U.S. organization devoted to blocking development of Canada’s oil and gas reserves that, incidentally, would compete with America’s own resources. Vivian Krause, a Vancouver-based researcher and writer, has documented the money funnelled through Tides Foundation, New Venture Fund and the Oak Foundation to impede Canadian hydrocarbon growth, especially the oil sands.

These organizations are bolstered by a coterie of narcissistic celebrities whose vacuous certainty is outdone by their ignorance of science and economics and their extravagant carbon-intensive lifestyles. All this brings to mind when, as minister of natural resources, I wrote an open letter labelling certain environmental groups as “radicals,” financed in part by non-Canadian donors. The derisive outcry was deafening from media, opposition parties, ENGOs and even a few timorous senior executives in the oil and gas business.

I once challenged any environmental organization to name a single project it supported

I defined radical as opposition to every major resource project. Moreover, I issued a challenge to any environmental organization to name a single pipeline project that it supported. The silence was deafening. Possibly because my definition sounded too reasonable, the media never reported on my explanation of the definition or the challenge, which I reiterated numerous times.

What I said was factual then and has been conclusively proven to be true over the past six years. Trying to shut down fossil-fuel development is not viewed as radical to many environmentalists, even though the economic consequences would be disastrous. Or perhaps it was impolite in Canada to use the “r” word. It was obviously politically incorrect.

Irrespective of terminology, we have undoubtedly reached a crisis resulting from unrelenting opposition to pipeline construction, abetted by foreign funding and a federal government obsessed with green ideology.

It is telling that opponents are unimpressed by governments’ efforts to reduce greenhouse gas (GHG) emissions. They understand that Canada cannot make a meaningful difference to international emissions, since our output represents only 1.6 per cent of the global total. Their focus is on the oil sands, which they claim can measurably add to the global supply of oil, so keeping fossil fuels in the ground is their goal. The fact the oil sands only represent a minuscule one-thousandth of global emissions makes it the wrong target. But symbolism is everything.

Militants are indifferent to the terrible damage they are inflicting on our economy, First Nations and the poor, all without any measurable impact on global warming. Further, they assert that Canada has a moral responsibility to make costly but ineffective sacrifices, even though other countries are not doing their share.

The B.C. government’s campaign against the Trans Mountain pipeline expansion proves there is no point in succumbing to extortionate demands or making costly concessions to achieve an elusive social licence. The goal posts keep moving. By now, that must be evident even to Alberta Premier Rachel Notley and federal Natural Resource Minister Jim Carr, though they will never admit it.

At what point might Kinder Morgan headquarters in Houston cancel the project in frustration with its mounting financial and reputational risk? That would landlock Canada’s energy for a very long time, a disastrous result, which is the goal of opponents. It is time for Parliament to declare the pipeline a work “for the general advantage of Canada,” thereby removing most dilatory tactics (but not social resistance). Prime Minister Justin Trudeau should also tell foreign agitators to butt out of Canadian affairs.

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Foreign direct investment in Canada plunges to the lowest in eight years

And for the first time in a decade foreign companies sold more Canadian businesses than they bought

Bloomberg News

Theophilos Argitis

March 1, 2018
11:08 AM EST

Foreign direct investment into Canada plunged last year to the lowest since 2010, hampered by an exodus of capital from the nation’s oil patch and worries about the fate of the North American Free Trade Agreement.

Direct investment dropped 26 per cent in 2017 to $33.8 billion, Statistics Canada reported Thursday in Ottawa. Capital flows dropped for a second year, and are down by more than half since 2015. The investment that did take place was from reinvested earnings of existing operations. Net foreign purchases of Canadian businesses turned negative for the first time in a decade, which means that foreign companies sold more Canadian businesses than they bought.

The shrinking investment underscores how the energy slump is lingering in a Canadian economy that last year also began to face the additional headwind of growing U.S. protectionism. It also marks a setback for Prime Minister Justin Trudeau’s Liberal government, which has emphasized attracting foreign companies.

Falling foreign direct investment is important. The country’s economy has relied heavily on foreign funding since the global recession — totalling more than $500 billion since 2008 and about $130 billion over the past two years alone, according to balance of payment data.

Unlike portfolio investment, foreign direct investment is considered a stable source of funding that comes with the additional benefits of a transfer of know-how. Instead, an increasing amount of Canada’s funding needs are being met by short-term funds denominated in foreign currencies — which makes the country more vulnerable to a sudden loss of interest from foreign investors.

ConocoPhillips and Royal Dutch Shell Plc are among the companies that led the exodus from the nation’s energy sector last year. The biggest foreign investment in Canada last year was the purchase by Hong Kong’s richest man, Li Ka-Shing, of Reliance Home Comfort, a water heater and air conditioner firm for $2.82 billion.

And the numbers continue to move in the wrong direction. According to Bloomberg data, foreign acquisitions of Canadian businesses fell to $3.8 billion in the fourth quarter, the lowest since 2009.

This report looks ahead at a carbon-constrained future in which Canadian oil and natural gas can thrive under the right conditions. It addresses significant issues facing industry today such as competitiveness, market access, climate and innovation, and benefits to all Canadians and our Indigenous peoples.

There is a place for Canadian oil and natural gas in the future global energy mix but only if industry and government work together to strike a balance between environmental stewardship, energy security, and prosperity for all Canadians.

The key issues addressed in our report include:

The Future Energy Mix – Canada’s role to help meet the future global energy demand as the world’s population grows to 9.8 billion people by 2050. While renewable energy will play a larger role in the future energy mix, oil and natural gas will continue to account for 52 per cent of total energy demand.

Climate Leadership and Innovation – Innovation and the adoption of cost-effective clean technology will ensure the future of sustainable development of Canadian oil and natural gas.

Market Access – There is an opportunity to supply the world with Canadian oil and natural gas but without access to emerging markets, a streamlined regulatory system, and a competitive tax structure we risk losing capital to competing jurisdictions.

Benefits – All Canadians benefit from a healthy and robust oil and natural gas industry. In 2015 the energy sector contributed more than $160 billion to the country’s gross domestic product, and nationally created more than 640,000 jobs, and invested $3.3 billion in 396 Indigenous businesses in 66 communities.

Competitiveness – Competition for global capital investment is strong in other jurisdictions such as the United States, and competes with Canada for the same traditional markets. Although the U.S. is Canada’s largest customer, it has now become our largest competitor.

Canada is poised to become one of the world’s most sustainable energy suppliers at a time when environmental stewardship and responsible development are needed the most. In order for our oil and natural gas to be part of the global future energy mix, we must urgently address the challenges facing industry today.

“Our government will help families and small businesses save money, invest and help our province grow,” Moe said. “Part of that commitment is to exempt agriculture, life and health insurance from PST.”

The exemption covers agriculture, which includes crop, livestock and hail insurance premiums as well as individual and group life and health insurance premiums. Health includes disability, accident and sickness insurance.

The exemption is retroactive to August 1, 2017, the date PST was applied to insurance.

The change has an impact of $65 million on revenue forecast for 2017-18 and a $120 million impact on revenue forecast for 2018-19.

Moe said the financial impact can be accommodated within the government’s three-year plan to balance the budget by 2019-20.

“Our fiscal plan remains on track, even with this reinstatement of the PST exemption on crop, life and health insurance,” Moe said.

The Ministry of Finance will work with the insurance industry to determine the best way to refund individuals and businesses that have paid PST on agriculture, life and health insurance premiums. More information about how the refunds will be administered will be available by April 10.

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Investors bail on trapped Canadian oil as pipeline woes deepen

By The Canadian Press

Feb. 21, 2018, 5:57 p.m.

Canada’s energy companies can’t get any love, even from many Canadians.

With pipeline, regulatory and political frustrations reaching new heights, the nation’s energy stocks slumped to their lowest level in almost two years this month. The iShares S&P/TSX Capped Energy Index ETF, which tracks Canadian energy companies, has seen about $56 million in outflows this year versus $32 million in inflows for an ETF focused on U.S. stocks. The pain has extended to the fixed-income market, with U.S. dollar high-yield bonds from Canadian energy issuers returning less than their global peers in the past 12 months.

At the heart of the sector’s woes is a dearth of pipeline capacity, which has depressed Canadian oil and natural gas prices. A new regulatory regime designed to speed up pipeline approvals is instead seen delaying projects while Alberta and British Columbia are fighting over one of the conduits the federal government has approved. On top of that, the industry is facing carbon taxes other jurisdictions don’t have to pay and it’s competing with American drillers which are seeing taxes cut under the Trump Administration.

“I’m not crazy about Canada,” Paul Tepsich, founder and portfolio manager at hedge fund High Rock Capital Management Inc. in Toronto, said by phone. “We’ve got taxes going up and regulations going up.”

Tepsich said he reduced the average exposure to Canadian energy equities in his clients’ to well under 3 percent from 8 percent a year ago. And while credit exposure remains relatively steady, he has no plans to add new holdings. He’s been adding to short-dated U.S. Treasuries amid market volatility and will look to selectively add U.S. energy names.

The big albatross for Canadian energy companies has been weak prices, caused by the pipeline pinch. Western Canadian Select, the main grade of oil extracted by Canadian oil-sands producers, is trading near the widest discount to West Texas Intermediate crude in almost four years. Alberta Energy Co. natural gas prices are also lagging their U.S. equivalent. WCS discounts would cost the Canadian economy about C$15.6 billion a year, or 0.75 percent of GDP, if maintained at current levels, Scotiabank Chief Economist Jean-Francois Perrault said in note.

The pipeline frustrations recently erupted into a trade war between oil-producing Alberta and neighboring British Columbia after the coastal province proposed limiting new shipments of oil-sands crude through its borders, possibly stalling a major expansion of the Kinder Morgan Inc. oil pipeline. Alberta Premier Rachel Notley banned imports of B.C. wine and abandoned talks to possibly buy more electricity from its neighbor.

Prime Minister Justin Trudeau’s government also announced earlier this month a plan to revamp the national energy regulator with a goal of giving the industry a speedier, more efficient approval process. But the plan also may include adding new types of projects that require federal approval and allows more input for some stakeholder groups, sparking industry fears it won’t become any easier.

Legal Challenges

The proposed legislation appears to effectively prevent any major new project from reaching any form of positive recommendation, the research team at GMP FirstEnergy, a major investment bank to the energy sector, said in a note. “A lack of hard timelines and a regulatory process that has been subject to dithering and near endless legal challenges will become the major stumbling block for domestic and international investor confidence in the Canadian energy sector.”

Federal Resources Minister Jim Carr said earlier this month the Liberal government has balanced government support for the energy industry with protecting the environment and receiving input from Canadians, noting C$500 billion in projects are planned over the next decade.

Banker and bondholder willingness to refinance debt and give companies time to boost output helped keep many struggling producers out of bankruptcy as oil prices slumped in recent years. Investor flight means it will be tougher for Canadian energy companies to access financing for capital-intensive projects. Suncor Energy Inc.’s $14 billion Fort Hills project, approved when WTI was $100 a barrel but started production last month, may be the last of a generation of mega Canadian oil-sands projects.

‘Zero Confidence’

“I’m inclined to believe that we don’t see another oil-sands project built,” Geof Marshall, the guardian of $40 billion of assets at CI Investments’ Signature Global Asset Management in Toronto, said by phone. The majority of his energy holdings are concentrated in U.S. regions like the Permian Basin, where there’s more capacity to move the commodity, he said.

Rafi Tahmazian, who helps manage about C$1 billion in energy investments at Canoe Financial in Calgary, said he began trimming holdings of Canadian energy equities after Justin Trudeau was elected in 2015. He started shifting further into the U.S. after Donald Trump became president and vowed to trim regulations and environmental protection.

CALGARY — Delayed oil pipeline construction is causing a steep discount for Canadian crude prices that is costing the economy roughly $15.6 billion a year or about 0.75 per cent of GDP, according to Scotiabank.

“Pipeline approval delays have imposed clear, demonstrable and substantial economic costs on the Canadian economy,” said bank chief economist Jean-Francois Perrault in a report Tuesday.

The discount, however, is expected to ease through the year as more rail capacity becomes available to ship oil, bringing the expected cost to roughly $10.7 billion or 0.5 per cent of GDP for 2018 and then $7 billion or 0.3 per cent of GDP a year until more pipeline capacity comes online.

The costs come as delays continue for all three major proposed oil pipelines to export more oil from Western Canada, including Kinder Morgan’s Trans Mountain expansion, Enbridge’s Line 3 replacement, and TransCanada’s Keystone XL.

Canadian producers would need Line 3 and at least one of the other pipelines to go forward or face indefinite pipeline constraints that would have an impact on Canada’s well-being with consequences that extend well beyond Alberta, said Perrault.

“The elevated discounts come with a steep economic cost, and represent to a large degree a self-inflicted wound,” he said.

The latest economic impacts of the pipeline constraints come as Alberta and British Columbia continue to quarrel over the construction of the Trans Mountain project, pitting arguments of economic impact against the importance of protecting coastlines and limiting greenhouse gas emissions.

The current squeeze in pipeline capacity has been expected for some time, but the leak and temporary shutdown on TransCanada’s Keystone pipeline last November sped up the problem, said Perrault.

The shutdown led to oil storage tanks in Alberta to fill to record volumes and sent the spread between Western Canadian and U.S. crude to more than US$30 a barrel, while the regulator-imposed 20 per cent reduced capacity on Keystone has continued to limit a recovery.

The discount on Western Canadian oil production since the spill has hovered around US$24 a barrel, much higher than the US$13 spread for the past two years, and Scotiabank expects it to average US$21.6 a barrel for 2018.

Western Canadian production is discounted somewhat both by quality and transportation costs, but has spiked several times in the past decade as pipeline space runs tight.

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Second Lowest Unemployment Rate in Canada

Released on February 9, 2018

Saskatchewan’s unemployment rate was 5.4 per cent (seasonally adjusted) in January – tied for the second lowest rate among the provinces and below the national rate of 5.9 per cent according to Statistics Canada.

There were 560,100 people employed, 1,500 more jobs compared to January 2017, including an increase of 4,900 full-time jobs.

Employment in Saskatchewan was up 1,100 from the previous month (0.2 per cent), the highest percentage increase among the provinces (seasonally adjusted). There were 6,200 full-time jobs created month-over-month.

“This is definitely a positive indicator that Saskatchewan’s economy is on the rebound,” Minister of Immigration and Career Training Jeremy Harrison said. “With our unemployment rate being second lowest in the nation and employment up, in addition to recent good news on building permits and urban housing starts, 2018 is looking to be a good year for our province.”
Major year-over-year gains were reported for accommodation and food services up 2,300; public administration up 2,000; business, building and other support services up 1,700.